The row over China's currency valuation will rumble on behind closed doors at this weekend's G7 meeting in Germany. It is unlikely to reach any conclusion. Certainly, the hopes of some US pundits that a new international alliance will come together to demand a 40 per cent rise in the Chinese yuan will be confounded. Unlike the China-bashers in Washington, European and Japanese officials have little faith that yuan appreciation could solve the world's economic imbalances, nor do they have much appetite for a stand-up fight with Beijing. Testifying before Congress last week, Fred Bergsten, director of the influential Peterson Institute for International Economics, accused China of deliberately holding down the value of its currency 'as an off-budget export and job subsidy' that allows it to export its unemployment to the rest of the world. The resulting global economic imbalances, he said, represent 'the single largest current threat to the continued growth and stability of the US and world economies'. To tackle the problem, Mr Bergsten called for a 'down payment' from Beijing of at least a 10 per cent appreciation of the yuan by May of this year. He claimed that over a longer time horizon of several years, a 40 per cent rise in the yuan against the US dollar will be necessary to reduce America's current account deficit by US$150 billion a year and correct the imbalances distorting the global economy. To achieve this, he recommended the US gang up with Europe and Japan to forge a new Plaza Accord which would press for an appreciation of the Chinese currency against the US dollar and euro. He said they should also file a case against China's exchange rate regime at the World Trade Organisation as an illicit export subsidy. Although Mr Bergsten's stance has some enthusiastic backers in Washington, it is unlikely to go down so well in either Tokyo or Brussels. The 16 per cent slide in the yen against the US dollar over the last two years has restored much of Japan's lost competitiveness against China and benefited Japanese companies which export to the US and Europe. Japan would profit little from an international currency battle against China. It might seem that Europe would have more to gain. Over the last five years, the euro has risen by 35 per cent against the yuan. But European economists are not convinced yuan appreciation would solve anything. A recent European Commission-sponsored policy brief argued that a 30 per cent appreciation of the yuan would reduce Chinese exports to the US, Europe and Japan by only around 10 per cent in the short run. However, that slack would immediately be taken up by exporters in other Asian countries including Indonesia, Korea, Taiwan, Thailand and Vietnam, who would see their competitiveness enhanced. As a result, said the study, 'the impact of a revaluation of the yuan on the US trade deficit may be quite limited'. The net effect on global imbalances would be minor, although the hit to China's economy would be painful. With such a lack of consensus among the world's major rich economies, the chances of this week's G7 summit agreeing any action on the yuan look minimal.